Monthly Archives: June 2009
I’ve been thinking about business plans lately and how they are both extremely important and irrelevant at the same time. It reminds me of something my high school algebra teacher used to say to us whenever someone would ask, “Are we ever going to use this in real life?” He would always respond that algebra was like Phys Ed for the brain. He didn’t care if we ever used it and he didn’t think we should care either. We were exercising our brains, changing the way we approach problems, and becoming smarter in the process.
To me, a business plan is like Phys Ed for your business. It forces you to answer really important questions like “Who is my competition?”, “What makes this business unique”, and the all-important “How am I going to make money at this?” If you have never started a business before, you naively believe that these questions are answerable. And I guess, that at a single point in time, they are answerable. The problem is that once you’ve put it on paper, it’s wrong. A new competitor has sprung up or you’ve made a change to your management team, or you realized that your pricing strategy will never work. But the process helps you understand your business better and makes your strategy sounder. By writing a business plan, you start to poke holes in assumptions you’ve held and you inevitably strengthen part of your business that was weak.
This coming week, I will be at Scout Camp with a group of 12 and 13 year old boys. My son is one of them and he and his friends decided that they could make some money at camp by purchasing pocket knives for $1 at Walmart and then selling them to boys at camp for $5. Had they gone through the process of creating a business plan (nothing formal, but a simple process) they might have asked themselves a couple of key questions like:
- Is there a commissary at the camp?
- If there is a commisary, do they sell knives?
- If so, how much do they charge?
- How much would I pay for a knife at camp?
I don’t know the answers to those questions, but I am going to guess that the answer is that yes there is a commissary at the camp and they probably sell pocket knives for about $5 which is probably about what a 12 year old scout would pay. If they had gone through this exercise, they could still proceed with their plan with a slight change — maybe they need to lower the price to $3 per knife when they are at the camp to beat out the commissary. Unfortunately, they didn’t do the planning exercise and when they got to Walmart and saw that knives were $5 a piece, they just figured they could sell their knives at camp for $10. They made a classic mistake since they hadn’t done any planning. They just assumed that the market would bear whatever price they wanted to charge. I’m predicting a loss for their fledgling knife business, but I hope they prove me wrong.
The point is, a change in plans is going to happen. If you have gone through the exercise of planning, you will be much better at adapting to the changing circumstances than if you are just flying by the seat of your pants. Your business plan will probably gather dust on a bookshelf somewhere, but your business will be better because you exercised your brain.